Gym Acquisition that didn’t workout

As soon as friction creeps into a relationship clear communication can save a whole heap of trouble.? The relationship in this Tale had a sound foundation. Friends and former colleagues in a property investment company, Paul and Idrees knew each other well and you can imagine the conversation, full of optimism and excitement, when Paul called Idrees to invite him to join his next venture.

Idrees, that you? ?Time to relive our former glories!? This is the best thing yet, you need to get in on the action, quick.

Hold your horses. What’s going on? ?And how the devil are you?

Great thanks, we can do the pleasantries later, so are you in?

In what?

Oh yeah, ok, this is the deal …

The Deal

Paul’s plan was to use the easyGym brand, and its database of 500,000 former members, to create a startup that would franchise gyms internationally, develop a technology platform to help run the gyms and design a workout generating app.? The app, to be called PACK45, would use an algorithm to randomise and personalise workouts designed to last 45 minutes.? Idrees’ role would be to develop the digitised platform and the algorithm.? Idrees liked the idea so much, he made an initial investment of ￡50k of his own money and said he would be happy to ‘run my savings dry’.?

They started working on it straight away and in 2020 Paul set up the company structure with Bespoke Articles and he introduced a third director James Gilbert. ?Idrees was appointed a director with the role of Chief Technology Officer.? A few months later Idrees entered into a Consultancy Agreement with the Company so he would be paid for his services as an independent contractor.? The consultancy was terminable on 30 days’ notice if, in the reasonable opinion of the board, Idrees was negligent or incompetent.

Cracks in the Relationship

The business got off to a good start.? The company took on franchises to run four easyGyms in the UK and a Master Franchise for Frances and Kenya. Idrees developed the PACK45 App and recalled that Paul was delighted with it.? On 21 December 2021 Idrees received a bonus and it looked as though the relationship between Idrees and Paul was running along smoothly.

However, beneath the surface, Paul thought that Idrees was not really entitled to the bonus and had been overcharging for the consultancy services; he was failing to attend meetings and answer messages but Paul did not raise these issues with Idrees and approved the payments.? According to Paul, he later discovered that, immediately after receiving the bonus Idrees told a colleague that he was stepping back from the business, and at a meeting on 29 December 2021 Idrees made a ‘surprise announcement’ that he wanted to leave the company to pursue other interests.

Paul later gave evidence that this gave him real concerns about Idrees’ commitment to the company and unsure how to handle the situation, Paul consulted James the third director.? James’ advice was simple. ‘Fire this guy’.? Two weeks later Paul and Idrees had a conversation, a difficult conversation critical to the future of their business relationship.? Paul’s account of the meeting was that Idrees said he wanted a clean break and to leave with immediate effect.? However, Idrees had a completely different recollection.? He said he told Paul he was unhappy with the way Paul was running the business by himself, excluding Idrees from tech meetings and told Paul that if it did not improve it would be difficult to continue working together.? Idrees recalled that Paul said he would make an offer for his shares but Idrees never received the offer.

This was a critical moment when, in reality, Paul and Idrees were not far apart.? Both wanted to find a way out of their relationship, and both indicated a willingness to negotiate. ?Any attempt at negotiation, whether direct or with the help of a neutral third party, could have saved them from the bitter dispute that followed.

Resolution to dismiss

Rather than an offer to buy him out, Idrees received an email from Paul notifying him that the Board had resolved to remove him as a director and, therefore, he was deemed to be a Bad Leaver.? That triggered the right for the other shareholders to acquire Idrees’ shares for their issue price or fair value, if lower.? Idrees sued for unfair prejudice and wrongful termination of the Consultancy. The court found that Paul’s account of events could not be true.? The resolution to terminate Idress’ directorship had not complied with the Articles, failing to give Idrees proper notice and opportunity to respond to the allegations.? Accordingly, the treatment of Idrees was unfair and prejudiced his rights.?

This is a Tale of woe.? An orderly exit was there to be negotiated but Paul tried to use the Bespoke Articles to dismiss Idrees so he could acquire his shares cheaply.? However, he failed to comply with the Articles strict requirements and treated his old friend and colleague unfairly.? Early facilitated conversations could have drawn out the issues and recovered the relationship before it broke down.? The moral, never stop talking and when the conversations are too difficult to manage on your own find a professional to help.

For the full story and legal analysis see https://caselaw.nationalarchives.gov.uk/ewhc/ch/2023/1514.